updated 03:15 pm EST, Tue December 3, 2013
Revenue shared based on stream popularity
Following criticism from musicians, Spotify has defended its business model by providing an in-depth look at its royalty payment framework. In a lengthy blog post, the company claims to have paid out more than $1 billion USD in royalties to-date, including $500 million from this year alone, with 70 percent of overall revenue being shared with the artists.
Despite rumors of a flat-rate payment scheme based on the number of streams, Spotify's royalty payments are doled out based on a dynamic formula that considers an artist's popularity in different countries, combined revenue from advertisements or premium subscriptions in each country, and differences in currency value.
The company suggests that its premium subscriptions bring $120 in spending per year, compared to an average of just $55 in purchase value for the average music buyer in the US. The ratio of paid subscriptions to free listeners has continued to grow, reaching six million and 18 million, respectively, in 2013.
"We personally view 'per stream' metrics as a highly flawed indication of our value to artists for several reasons," the company notes. "For one, our growing user population might listen to more music in a given month than the month before (resulting in a lower effective 'per stream'), while generating far more aggregate royalties for artists."
Radiohead's Thom Yorke earlier this year removed his solo music from Spotify, arguing that the service brings poor royalty payments for small and large artists.
In its latest blog post, Spotify cautions that the compensation received by artists is often a much smaller cut than what the streaming service pays to the artists' record label, due to the terms of contracts between the artists and record labels, though independent artists can retain up to 100 percent of their royalty payouts.
"That 70% is split amongst the rights holders in accordance with the popularity of their music on the service. The label or publisher then divides these royalties and accounts to each artist depending on their individual deals," Spotify adds. "But even though we are currently generating millions of dollars in royalties for rights holders for the top artists each year, we're just getting started and expect to earn artists and rights holders far more as we grow our user base."